Microfinance: The Solution to Global Poverty?

Posted by Cameron Scherer on October 01, 2014

by Elise Sidamon-Eristoff

I spent two months this summer living in a rural village in Western Kenya where I taught optimistic, bright women basic accounting skills, coached them in computer literacy, and led community development exercises. I arrived animated and eager to achieve every goal in my job description, but when I left eight weeks later I had not accomplished any of my objectives. Instead, I had gained a clearer picture of the complexities associated with microfinance and the poverty it addresses.

Microfinance as a tool to alleviate poverty is both supported and criticized by development experts in the international community. Mohammed Yunus, the founder of one of the largest microfinance institutions in the world, champions microfinance as a tool capable of ending global poverty. He sees the poor as a vast resource of fresh, entrepreneurial ideas waiting to be unleashed, and believes micro-loans provide the masses with this opportunity.

His Grameen Bank employs a largely successful model of micro-lending, in which the bank gives small loans to individuals who are expected to repay the money in weekly installments over one year at a 20 percent interest rate. The bank requires prospective borrowers to form groups of five and undergo a weeklong training program that culminates in an oral exam prior to receiving a loan. Group formation ensures that individuals will pressure one another to pay on time and they will cover one another during times of need.

Microfinance institutions have had many positive impacts on the individuals and communities they have worked with. In my experience working with a microfinance organization in Western Kenya, these loans enabled families to put their children through school, buy fresh produce and meat, and expand their homes.

Nevertheless, microfinance, like all business ventures, is an imperfect institution.

A major challenge I encountered was a communicative and visionary disconnect between the leaders of my organization in the United States and the women who ran the organization’s branch in the village. Many of the instructions given to the women were culturally insensitive or unrealistic. For example, the Kenyan leaders hesitated to name defaulters to the local chiefs capable of seizing repayments because the leaders feared the societal repercussions from ruining their neighbors financially. These nuances were difficult to notice from abroad, and were compounded by the villagers criticizing one another’s ideas indirectly. As a result, many of the leaders’ procedural complaints went unnoticed over the phone during our conversations with the United States.

Similarly, the business model microfinance imposed on the village did not fit residents’ pace of life. Women showed up to meetings late after stopping to chat with neighbors or picking their beans before the clouds they saw turned to rain. Repayment schedules did not account for the starvation months, and many women defaulted on their loans in order to feed their families. The villagers had to learn to communicate via email, and none were familiar with the accounting skills used in the U.S. to track loan repayments.

Many of the leaders’ procedural complaints went unnoticed over the phone during our conversations with the United States.

My skepticism about the effectiveness of microfinance was also fueled by observing the small scale of the businesses. Income generated from these businesses was barely enough to cover the costs of repaying the loan, and I met many women whose businesses failed altogether. The most successful businesses generated income that genuinely changed their owners’ lives for the better, but it seemed unrealistic that many of the family-owned businesses were on the path to expansion.

Microfinance has positive impacts on the individuals and families who succeed in adopting its dogma, however, the challenges I observed illustrate several of the limitations it faces. Perhaps, accepting that microfinance is only one of many tools to end global poverty is the first step towards working together with organizations around the world to find a solution.

The opinions expressed in this article are the author's own and do not reflect the views of their employer or Young Professionals in Foreign Policy.